Historically, in-house finance in Australia was offered in few industries other than those supplying office, EDP equipment and motor vehicles where the importance of making a customer "captive" in order to facilitate equipment upgrades over time, was recognized at an early stage.
In general, most "vendor finance" was in reality a referral by sales staff to a relationship financier or independent lease broker. Alternatively, transactions were taken onto the vendor's own books, particularly on a short- term rental basis following the introduction of new accounting standards for leasing, AAS17 in 1985.
As the finance market developed, vendors came under pressure to provide competitive funding alternatives to support their sales activities. This was particularly prevalent in the IT and office equipment sectors where technological obsolescence guaranteed a customer's need to regularly upgrade equipment.
The provision of finance, particularly rental finance, ensured the customer was compelled to renegotiate terms in the event an upgrade was required prior to the expiry of the initial contract term.
By providing finance for the equipment in the first place, the vendor was assured of being integral to the customers next purchase decision - by being better placed to offer upgrades, discounted termination values if their own product would again be purchased, etc.
By the early 1990's the demand for vendor finance had spread to a variety of industries, reflecting trends in Europe and the United States.
In the heavy commercial vehicle sector for example, the demands placed upon distributors and manufacturers by major clients saw the number of vendors offering some form of customer finance grow from one or two firms to every distributor within five years.
Early vendor finance programs were fairly rudimentary in their establishment and approach and as a consequence failed to "add value " to the sales process - the principal reason for their establishment.
Many, established by the lease broker market (who were a far more effective marketing force than "main- stream" lenders), lacked the technical sophistication to cater to larger clients who tended to negotiate their own finance terms with their relationship Bankers.
In addition, the broker market was often unable to deliver an acceptable level of service or competitive pricing on a national basis as was often sought by the vendor, expected by its sales force, and demanded by its customer base.
Some programs were established directly with financiers who co-branded documentation to reflect the "joint venture" nature of the funding and referral relationship.
Many of these programs failed due to the reliance by the vendor on a single funding source for its broad range of customer credit profiles and the need to be rate competitive across a range of transaction sizes. Unlike those programs established by brokers, financiers often lacked the necessary marketing drive and responsiveness to support the vendor's sales and marketing function.
In general, no one lender could be interest rate competitive across the entire market and have unlimited credit appetite for every customer put forward. Many vendors found that a refusal by their single funding source left them without a formal finance program to offer their customer, resulting in loss of face and ultimately, a lost sale.
Alternatively, financiers sought to mitigate their exposure to a vendor's customer base by seeking partial or full credit recourse to the vendor in order to consider all transactions put forward.
These were often for transactions where the underlying credit risk was marginal and unable to be set in the market on normal commercial terms. As a consequence the credit recourse was frequently called upon when default under the finance contract occurred.
Many vendors, having sufficient sales activity to justify the cost of establishing a fully functioning vendor program in-house, did so without sourcing appropriate finance staff and implementing effective credit controls.
These programs initially performed well, but became extremely cumbersome and expensive to maintain once transactional volumes grew and the inevitable increase in arrears, bad debts and compliance costs associated with conforming to regulatory guidelines, took their toll.
More recently, tax changes following the introduction of GST and the distinction between taxable supplies and financial supplies applicable to different financial products, overdue interest and bad debts, have led to a general reappraisal by many vendors as to the cost effectiveness of maintaining their own captive program in-house.
The need to take up the profit on sale over the funding term where equipment is financed in-house under rental contracts, has also led to a growing preference to outsource the finance activity.